Trains, Chips, and Servers: China Moves to Corner the IT Market

The China Banking Regulatory Commission (CBRC) has issued a plan calling for “sinification” of the Chinese banking industry’s IT infrastructure, including computers, network equipment, data storage equipment, security devices, software, and other items. The plan would require that 75 percent of this IT infrastructure be Chinese-sourced by 2019. While this state-mandated shift to domestic products has been attributed to national security concerns after the Edward Snowden leaks, other analysts indicate that this may be a pretext for intensifying an industrial policy strategy that has been in the works for years.

According to another article from the official Xinhua news agency, key parallels exist with respect to the industrial policies that led to the development and, ultimately, the globalization of China’s high-speed rail industry. While the immediate effects of the “server sinification” campaign may be to chisel away at foreign IT companies’ dominant market share in China, global market share may also be compromised over the next decade as the strategy continues to gather momentum.

One phrase in particular from CBRC’s plan should trouble global IT manufacturers: “introduce, digest, assimilate, and re-innovate.” This phrase is intimately connected to the “indigenous innovation” strategy that China introduced on a large scale in the middle of the last decade. It essentially signals the intention to utilize Chinese market demand, much of which is controlled by state enterprises, to leverage the transfer of technology into the ownership and control of Chinese firms, which will then tweak the technology and market it both domestically and abroad. According to an analyst quoted in the Xinhua article, this is precisely the strategy that drove the development of the Chinese high-speed rail industry, which is now taking global markets by storm.

Outside of bilateral negotiations, there is probably little that foreign governments can do to contest the implementation of this strategy. In 2011, the United States secured a commitment from China to end policies linking innovation to government procurement, soon after winning a World Trade Organization (WTO) dispute against Chinese policies making wind power subsidies contingent on the use of domestic content. Whether procurement by state-owned enterprises and sub-central governments actually qualifies as “government procurement,” however, has been a key point of contention in China’s negotiations to join the WTO’s Government Procurement Agreement. Unlike similar Chinese policies in other industries, China can also point to a plausible national security justification in the case of IT products.

To the extent that they are forced into unfavorable agreements to protect Chinese market share today, global IT manufacturers should keep a close eye on their Chinese counterparts, who are likely to seek foreign sales aggressively as their capabilities grow.

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